In a letter to credit unions Tuesday, the NCUA reminded credit unions that the board-approved final rule that added the “sensitivity to market risk,” or “S,” component to the existing CAMEL rating system and redefined the “liquidity risk,” or “L,” component, becomes effective April 1.

The new sensitivity to market risk component rating reflects the exposure of a credit union’s current and prospective earnings and economic capital arising from changes in market prices and interest rates, and the liquidity risk component rating reflects a credit union’s ability to monitor and manage liquidity risk and the adequacy of liquidity levels, according to the NCUA.

The transition to CAMELS will not significantly affect the examination process nor add a burden to credit unions, the agency stated in the letter. The criteria for the “Capital adequacy, Asset quality, Management, and Earnings” components, and the composite rating, have not changed. Also, adding “S” and modifying “L” reflect factors that examiners routinely consider in evaluating a credit union’s financial condition and risk profile, the NCUA stated.

The NCUA has provided a framework that supports the uniform application of CAMELS and includes annual supervisory priorities and examination scope updates, routine updates to the Examiner’s Guide and National Supervision Policy Manual, a standardized examination platform and training program, regional and national quality assurance and control programs and periodic training that addresses the inter-relationships between and among risk categories and the CAMELS rating implications.

For additional insight into the “S” and “L” components, visit the New York’s State of Mind blog, written by Henry Meier, the New York Credit Union Association’s SVP/general counsel.